Kuroda Says Bank of Japan Will Consider Buying DerivativesToru Fujioka
Bank of Japan governor nominee Haruhiko Kuroda said that the central bank will consider buying derivatives if he’s confirmed as governor and signaled a readiness for a quick expansion in monetary stimulus.
“We will carefully consider such a proposal,” Kuroda, the Asian Development Bank chief, said in response to a lawmaker’s question in his second Diet confirmation hearing today. Opinions vary on the merits of buying assets such as swaps, Kuroda said, adding that he wants to discuss easing “soon” and bond purchases are likely to remain the key tool.
Extra stimulus may come as soon as April 4, according to Nomura Holdings Inc. and Mizuho Securities Co., with Kuroda today describing the scale of the BOJ’s current asset-buying as insufficient. While Sayuri Shirai’s proposal last week for an immediate start to open-ended asset purchases suggest Kuroda has at least one ally among existing board members, her colleague Koji Ishida today refrained from endorsing her view.
“This is a communications strategy, rather than an actual policy at this moment,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “Kuroda wants to impress the markets. Any type of asset, including derivatives such as interest rate swaps, should be on the table.”
Kuroda said in an interview last month that the BOJ could purchase the equivalent of trillions of dollars of assets to expand its balance sheet.
Central bank purchases of derivatives are rare, according to Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo who has done research for the Bank of Japan.
“Central banks need to be very transparent in regard to the risks involved in buying structured products, and that limits the possibilities for what they can buy,” he said.
In the U.S., the Federal Reserve acquired assets, including derivatives such as credit-default swaps and interest-rate swaps, as part of its $28.8 billion 2008 rescue of Bear Stearns Cos. The Fed said in June 2012 that it had been paid back with interest for its role in the bailout after selling off assets.
The Fed in 2003 discussed using sales of derivatives to influence interest rates, such as selling put options on longer-term Treasuries. The Fed has also sold options to create standby financing around the 2000 computer-date change and 2008 financial crisis.
Whether buying derivatives could be adopted by the BOJ is “not just an issue of persuading other BOJ board members, but also the technicalities in the market,” said JPMorgan’s Adachi. “If the market is very small and the intervention by the BOJ is significant enough to collapse the market, then perhaps even Kuroda will think it’s not a good idea.”
Kuroda was asked about buying interest rate swaps today by Kenji Nakanishi, a lawmaker in the opposition Your Party.
“Buying such assets can influence interest rates and avoid criticism of debt financing,” Nakanishi said.
“There are various opinions on whether it’s a good or a bad idea to buy swaps and other derivatives,” Kuroda replied. “We will carefully listen to and consider your proposal.”
Any such purchases would likely “be small, since increasing the amount of risk assets can potentially threaten the bank’s capital base,” said Izumi Devalier, a Japan economist at HSBC Holdings Plc in Hong Kong. “At the very least a loss-sharing accord with the government is probably a pre-requisite for such a move.”
The central bank currently buys government bonds with maturities of up to three years, as well as exchange-traded funds, real-estate investment trusts and other risks assets, through a fund targeted to reach 76 trillion yen ($791 billion) by the end of this year.
Kuroda has said that the BOJ will do whatever is needed to end 15 years of deflation should he be confirmed as governor and indicated that open-ended asset purchases could begin sooner than the planned January 2014 start. He has also pledged to consider buying longer-term debt.
The BOJ board voted eight-to-one against the proposal by Shirai on March 7, in Governor Masaaki Shirakawa’s final meeting before he steps down with his two deputies on March 19.
Board member Koji Ishida said in a speech today that a “sustainable fiscal structure” is important for expanded monetary easing, warning that yields on government bonds could rise if trust in fiscal discipline is lost.
At a later press conference, he declined to comment on buying derivatives and said asset purchases under the BOJ’s existing program are already “virtually unlimited.”
Benchmark 10-year bond yields reached an almost decade low of 0.585 percent on March 5 and finished last week at 0.65 percent. The yield was at 0.66 percent as of 3:57 p.m. in Tokyo.
The yen fell 0.1 percent to 96.07 per dollar, extending its more than 16 percent fall since mid-November, while the Nikkei 225 Stock Average closed 0.5 percent higher.
A weakening in the yen from “excessive gains” has been predicated on expectations of easing, a circumstance that won’t last forever, Kuroda said today.
Kuroda’s confidence that the BOJ can reach a 2 percent inflation target adopted in January within two years is yet to be reflected by economists, who predict a failure to achieve that goal in that time period, according to a Bloomberg News survey this month.
Japan’s machinery orders plunged 13 percent in January, the biggest decline in eight months, signaling limits on corporate investment as Prime Minister Shinzo Abe tries to drive an economic revival.
Paul Donovan, managing director of global economics at UBS AG, said that the impact of the BOJ’s asset buying depends on what banks do with the money.
“If the banking system just accepts the money the BOJ gives them and doesn’t do anything with it, then this money doesn’t go into the economy, it doesn’t go into the foreign exchange markets and it certainly doesn’t create inflation,” he said in an interview today with Bloomberg Television.
The Asian Development Bank said today that it will elect a new president by April 24. Japan, which has held the presidency of the Manila-based ADB since the institution was founded in 1966, last week said it would nominate Vice Finance Minister Takehiko Nakao to succeed Kuroda.
Abe has nominated Kikuo Iwata, an economics professor who backs greater government oversight of monetary policy, and BOJ Executive Director Hiroshi Nakaso for two deputy BOJ governor posts. The upper house confirmation hearing for them is tomorrow.